Viewpoint: No Subprime Crisis, but Fixes May Create One

By Vartanian, Thomas P. | American Banker, May 18, 2007 | Go to article overview

Viewpoint: No Subprime Crisis, but Fixes May Create One


Vartanian, Thomas P., American Banker


Will the cure be worse than the disease?

That is the question that arises among those working through the various issues posed by the dislocations in the subprime mortgage lending market. The word "dislocation" seems preferable to other more vivid descriptions used in the news media, such as "crisis" or "disaster."

Yes, some originators will go out of business, some consumers will lose their homes, and some executives and their companies will find themselves looking at the post-Sarbanes-Oxley business end of regulatory and prosecutorial powers. But the problem is not having a significant impact on regulated financial depositories, which generally have diversified their risks in the mortgage market. It has ensnared only a small portion of the mortgage finance system, and the market will continue to function and adjust without a "crisis" if Congress and regulators do not overreact.

What is happening now in the subprime mortgage business is a normal market readjustment that is necessary from time to time to balance the yin and yang of lending in a free-market economy.

Those who did not underwrite loans properly, defrauded consumers, threw cash at any and all types of products, or put themselves in situations that were completely inappropriate and perhaps illegal will have to pay the price, financially and otherwise. There are enough laws, rules, regulations, and federal and state regulators to deal with each and every aspect of this market adjustment.

As in the past, any overreaction by Congress, state legislatures, or financial regulators will have a more permanent and possibly worse impact than any aspect of the current subprime lending problem. Bad underwriting is fundamentally at the root of this problem, but an overtightening of standards - which could happen as Washington sends out a message of caution that mutates as it reaches the front line of bank examination - would have a significant impact.

Because of the plight of the minority who were coerced or defrauded, or who leapt freely into situations that were entirely inappropriate for them, should credit be denied to the majority of nonprime borrowers, who may be able to buy and maintain homes through innovative products? …

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Viewpoint: No Subprime Crisis, but Fixes May Create One
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